The Centre for European Reform is a think-tank devoted to improving the quality of the debate on the European Union. It is a forum for people with ideas from Britain and across the continent to discuss the many political, economic and social challenges facing Europe. It seeks to work with similar bodies in other European countries, North America and elsewhere in the world.

Thursday, January 29, 2009

One Frenchman, Jean Monnet, invented the European Commission, and another, Jacques Delors, was its greatest president. Yet the French are increasingly hostile to this Brussels institution. Those who spent time in France during the 2005 referendum on the EU constitutional treaty will remember that the No campaign was fired up by the belief that the Commission had become too ‘Anglo-Saxon’ (ie, economically liberal). Since then anti-Commission sentiment seems to have grown in France, at least to judge from the discussion at the recent ‘Franco-British colloque’, an annual gathering of politicians, journalists and business leaders from Britain and France.

Speaking at the opening dinner at this year’s meeting, in Versailles, Prime Minister François Fillon complained that the Commission had failed to lead during the financial crisis. During the off-the-record sessions that followed, French politicians and chief executives repeatedly attacked the Commission for its alleged weakness and ‘ultra-liberal’ economic philosophy. To give an example, the chairman of one of France’s biggest manufacturing companies was asked if the EU should take on a new role in regulating banking. “Absolutely not – because if the EU applies rules, the Commission will write them,” he said. “And the Commission will write the rules that the British government tells it to write. So we should keep the Commission out of banking regulation and give the job to the European Central Bank.” That comment is not particularly logical: even if the ECB were handed responsibility for supervising banks, the rules would still be drawn up by the European Commission, Council of Ministers and Parliament. But it does reflect the mood in the French establishment.

Several factors explain this hostility. The French are right about the Commission’s economic philosophy. The top jobs – President José Manuel Barroso, Competition Commissioner Neelie Kroes, Single Market Commissioner Charlie McCreevy and (until recently) Trade Commissioner Peter Mandelson – are or have been held by liberals. The same applies to many of the key officials. Thus at a recent CER seminar in Brussels on sovereign wealth funds, the director-general for trade, David O’Sullivan (an Irishman) argued that the EU should not try to regulate these funds. Instead it should welcome sovereign wealth funds that wished to invest in the EU. On a broad range of policy issues, ranging from state aid to the liberalisation of energy markets to France’s bid to stop foreigners investing in ‘strategic industries’, Paris has been in conflict with Brussels.

The French are also right that the Commission is weaker than it was in the good old days of Jacques Delors. It was rather slow off the mark to respond to the beginnings of the financial crisis, last autumn, though of course it has no sway over monetary or fiscal policy. Barroso lacks Delors’s empire-building ambition, and he is sometimes reluctant to get into fights with big countries (because he is so willing to be reappointed, some say). But although I am an admirer of Jacques Delors, I think that if Barroso tried to behave like him he would get nowhere. The member-states are much less willing than they were 20 years ago to tolerate an ambitious, agenda-setting Commission. They have got the more modest Commission they wanted. And to be fair to Barroso and his colleagues, it is difficult to lead the EU when – as in the second half of 2008 – a man as hyper-active as President Sarkozy holds the presidency. Sarkozy’s style was to sideline EU institutions. In fact by the end of 2008 the Commission had made something of a comeback, with its plan for an EU-wide economic stimulus, endorsed by the December European Council.

When the French complain that the Commission is a) too liberal and b) too weak, they should note the risk of a contradiction. A mightier Commission that, for example, pushed through a radical reform of the Common Agricultural Policy (CAP) might not be to Paris’s taste.

A third reason why the French have turned against the Commission is, I think, wounded national pride. France used to dominate the institution. Indeed, as recently as the 1990s, French was the predominant language within it. In the current Commission, France did not get one of the top jobs. Five years ago President Chirac sent Jacques Barrot, a middleweight politician, to Brussels, and he was given the relatively unimportant job of transport (though recently he moved to more important job of justice and home affairs). The more the French believe they have lost control of EU institutions, the less they like them.

Which is why the make-up of the new Commission is so important. Normally the commissioners are appointed during the summer months, after the June European Council decides on the president. This year the appointments may be postponed until the end of the year, to give Ireland the chance to vote Yes to the Lisbon treaty in the autumn (unless the Lisbon treaty comes into effect, the number of commissioners appointed must – under existing Nice treaty rules – be less than the number of member-states).

France is, understandably, determined to have one of the top economic jobs in the Commission. So is the UK. Barroso is likely to be reappointed but the British should not assume that economic liberals will get all the top jobs. One rumour in Paris is that Michel Barnier, currently agriculture minister, will be the French appointment. In his favour, he is a convinced European and has a broad range of experience, including stints as foreign minister and commissioner for regional policy. But his critics complain about his self-important manner and point out that he defends the CAP more staunchly than many other French politicians.

In Britain, of course, many people – including some Conservative politicians – still assume that the Commission is committed to tighter regulation and interventionist or left-of-centre economic policies. Interestingly, at the colloque in Versailles, half a dozen senior Tories (both members of the shadow cabinet and policy advisers) were listening to the debates. They said very little when the French attacked the Commission. That is not surprising: they would be uncomfortable either supporting the French criticism of economic liberalism, or defending the powers of the Commission. But I hope those Conservatives listened carefully, and that they may have seen that the Commission is, on many policy issues, a potential ally for the British.

Friday, January 23, 2009

On January 20th, Russian gas started flowing again through Ukraine, after a two-week shut-down that had left people in South East Europe freezing and factories idle. The relief across Europe was palpable but the confusion about what happened is still there.

First, both Russia and Ukraine said that the dispute was about money that Naftogaz, the Ukrainian gas company, owed to Russia’s monopoly Gazprom for last year’s deliveries. Then it was about the price the Ukrainians should pay in 2009 for the Russian (or Turkmen) gas that it uses domestically. Then Ukraine tore up a contract about gas transport to Europe and threw transit fees into the negotiations too. If this was not complicated enough, the dispute then centred on ‘technical’ gas that is needed to keep up volumes in Ukraine’s pipelines. When a handful of European gas companies offered to buy this technical gas in order to get things moving again, the Russians said that this wasn’t really the problem. At one point, Russia claimed that it was sending gas to Ukraine but Ukraine refused to accept it. Ukraine said the gas was coming down the wrong pipe and could only be delivered to Europe if it shut off supplies to Ukrainian factories and households. A group of observers cobbled together by the EU to find out whether gas was actually flowing from Russia to Ukraine never got down to work. The role of RosUkrEnergo, the lucrative trading company at the heart of the Russian-Ukrainian gas deliveries was, as always, unclear. Add the frosty political climate between an angry and increasingly desperate Russia and a divided and even more desperate Ukraine, and the situation is almost impossible for outsiders to understand.

Rumours and conspiracy theories proliferated. PR efforts were ramped up. Insults flew. Various ‘insiders’ offered diametrically opposed accounts of what was happening. The overall impression was that neither the Russians nor the Ukrainians wanted the EU to understand what the stand-off was about. If the parties involved prefer confusion and obscurity, any attempt at mediation – as launched by the EU, numerous European governments and the gas companies in the EU – is bound to fail.

In theory, the conflict has now been resolved. Prime Ministers Putin and Tymoshenko signed a deal on January 19th that is said to be very similar to an understanding they had already reached back in October (details of supply contracts are not usually published, not even those between Gazprom and EU energy companies). According to press reports, the new agreement runs for ten years, and therefore eliminates the haggling that has become an annual ritual since the early 1990s. As from next year, Ukraine will no longer receive subsidised gas from Russia but pay a price that is linked to the one of fuel oil, like all companies in the EU do. In turn, Gazprom will no longer get a discount on the transit fees it will pay Ukraine for shipping more than 120 billion cubic metres gas westwards every year. Under such a deal, there would be no place for shady middlemen – although RosUkrEnergo is reportedly moving into Ukraine’s domestic gas trade.

Does this mean that a repeat of the gas war is unlikely or even impossible? It is hard to say. The EU should not speculate but recount those things it knows for sure: first, both Russia and Ukraine considered it more important to fight for their narrow interests in this energy dispute than to defend their reputations as reliable supplier and transit state, respectively. This is deeply worrying. Second, Russia will not break up Gazprom. Ukraine has rejected the idea of running its pipeline system as a three-way consortium with Russian and European involvement. Monopolies have a tendency to become opaque and greedy unless properly regulated and monitored. Neither Russia nor Ukraine seem keen on doing this. An unpublished contract may or may not be enough to ensure the reliability of Gazprom and Naftogaz (and any intermediary that may yet follow RosUkrEnergo). Third, Russian gas accounts for a quarter of total EU consumption, and 80 per cent of this comes through Ukraine. For some EU countries the dependency is 100 per cent. Even if the supplier was Norway and the transit country Switzerland, this would be an uncomfortable position to be in.

To increase their energy security in the face of such uncertainty, the Europeans do not need to do anything they are not doing – or planning to do – already. The EU has already agreed targets for using more renewables and saving energy (although the latter is non-binding). A new liberalisation directive – if properly enforced – should help to build a more integrated EU energy market. The objective of constructing more interconnections between national gas markets has been there for years. A new initiative to link South East European gas markets (called NETS: new European transmission system) looks a little more concrete, and could get a boost since South East Europe was the region worst affected by the cut-off. On January 26th and 27th, the Hungarians are hosting a ‘Nabucco summit’ for consortium members and potential suppliers for this planned pipeline through Turkey and the Balkans. The project could do with a political push, as well as fresh ideas for financing it. As for its potential supplies, the EU is stepping up efforts to get a big contract with Azerbaijan. And two of the Nabucco consortium members, Austria’s OMV and Germany’s RWE, announced in December that they are dusting off plans to build a trans-Caspian pipeline to get Turkmen gas into Nabucco.

At their spring summit in March, EU leaders will discuss the Commission’s ‘strategic energy review’ (published in November, 2008). It contains useful ideas, for example a proposal to pool EU resources for securing contracts with outside suppliers such as Azerbaijan and Turkmenistan. EU leaders now need to focus on what they can do through concrete steps and investments to increase the EU’s energy security, not speculate about whether Russia and Ukraine may stick to their latest deal.

Thursday, January 08, 2009

'We're fed up with empty gestures', the Israeli prime minister told a high level delegation from the EU. Several foreign ministers and EU officials had come to the Middle East to try to help end the war raging in Gaza between Israel and Hamas, which has killed over 700 Palestinians and 10 Israelis in the twelve days since it started. The EU has been calling for a ceasefire and the reopening of Gaza’s borders.

Ehud Olmert’s chastising comments, reported by the Jerusalem Post on January 6th, summarised neatly the difficulties the EU faces in trying to help Israel ensure its security while alleviating the plight of Palestinians. Many Israeli leaders believe the EU does not have much to offer to improve their security and therefore pay little attention to the EU in times of crisis. But the EU should not be seen as irrelevant.

It will never have the leverage of the US (nor should it aspire to), but it does have stakes in the region. Among other things, the EU is Israel’s main trading partner and the largest provider of financial assistance to the Palestinians. In order to have more leverage in peace talks and mediation, the EU should play a stronger role in providing security for both sides.

So far, European countries have shied away from offering any serious commitments to improve the security between Israel and its neighbours. In recent years Europe has sent various missions to the region as part of monitoring or peacekeeping operations. The EU has a monitoring mission at the Rafah crossing (EUBAM, which has been dormant since Hamas has been in sole control of Gaza) and Europe has contributed the bulk of the troops to UNIFIL, the UN’s mission which supervises peace in South Lebanon. But both deployments have limited mandates. They focus on monitoring but avoid engagement with hostile forces.

As a result, Israel underlines the limitations of UNIFIL by pointing to Hezbollah’s rearming, which has been taking place unhindered since the end of the Israel-Lebanon war of 2006. And Israel has always been dissatisfied with EUBAM: it would like to see EU monitors intercept weapon smugglers, if necessary with the use of force. But the EU has been reluctant to take on such a role. Unsurprisingly, Israel hasn’t considered the offer to reinstate EUBAM as a deal clincher in the EU’s current efforts to promote a ceasefire in Gaza. In the midst of heavy fighting, it doesn’t seem particularly useful to offer this small scale monitoring mission (which, in addition, in order to function needs non-Hamas Palestinian officials, who all fled Gaza in June 2007).

European countries are understandably reluctant to send their troops to troublespots in this politically sensitive region. But the EU should be less risk averse and offer troops when monitoring missions are a necessary component of peace-building measures supported by local parties. The EU might not only help bring stability and give Palestinian civilians the impression that there is progress; it would also be taken more seriously by Israel, and subsequently acquire stronger leverage in the peace process.

At the time of writing, ideas were being discussed at the UN to end the conflict in Gaza. Amongst other initiatives, a French-Egyptian proposal would open the borders of Gaza and strengthen measures to combat the smuggling of weapons into the territory, including through the presence of an international force. Unknowns in the proposals still need to be addressed, not least how to secure the necessary consent of Hamas. But the EU should offer to take part in any international monitoring force, and support a strong mandate for that force. Israel will agree to end its military offensive and it will consider opening the borders to Gaza only if an international force is capable of genuinely limiting weapons smuggling. If Israel feels the force is underperforming it will only be a matter of time until Tel Aviv undertakes another military operation in Gaza.

An end to the violence and to Gaza’s economic isolation will be only two of the many difficult steps needed to reverse the deterioration of the last two years. In the long term Palestinian rockets and weapons smuggling can only be stopped if Hamas and other Palestinian factions lose the desire to fight. In order to achieve this Hamas will need to be engaged by Israel and the wider international community. But in the short term, by offering serious monitors, at least the EU can make a contribution to stabilising the conflict in Gaza, and can hope to reverse the perception of its empty gestures.

Clara Marina O'Donnell is a research fellow at the Centre for European Reform.

Wednesday, January 07, 2009

Russia has cut off the gas flowing to and through Ukraine – again. Like in January 2006, Moscow and Kyiv are blaming each other, while a convoluted mix of political intrigues, shady middlemen and broken contracts makes it almost impossible for outsiders to ascertain which side is at fault. But the current interruption in gas supplies to Europe is different in many ways from that three years ago.

First, the interruption is more severe but some EU countries appear to be better prepared. In January 2006, when Gazprom first turned off the tap over a pricing dispute with Kyiv, the volumes affected were much smaller. On January 7th 2009, Russian gas supplies through Ukraine (which account for over 80 per cent of all Russian gas sales to Europe) stopped altogether. The bigger EU countries, such as Germany, Italy and France, have plenty of gas in storage and they can use more Norwegian or Algerian or domestic gas instead. However, some of the newer member-states are not so lucky. Bulgaria, Slovakia, Hungary and Poland, with little storage or access to alternative suppliers will have to ration gas. A spike in energy prices is the last thing Europe’s struggling industries need at the moment. Calls for European ‘energy solidarity’ will suddenly acquire a new meaning.

Second, the political dynamics are very different. In 2006, when memories of the orange revolution were still rather fresh, many Europeans were quick to blame Russia for using energy to punish pro-western Ukraine. Now Ukraine’s squabbling, self-serving leaders attract little sympathy. The fact that Ukraine does not have a functioning government mattered less as long as its economy was doing well. But now it has become one of the main obstacles to resolving the crisis.

Russia has considerably beefed up its PR efforts, having warned of potential supply cuts weeks ago (and blaming the Ukrainians in advance). But the fact that some smart people speculate whether Russia has deliberately caused the gas crisis to destabilise Ukrainian politics or to push up global energy prices shows just how little credibility the country has, especially after the Georgia war. Both Moscow and Kyiv had reassured the Europeans numerous times that gas transit to the EU would not be affected. Now half of Europe is living of its own gas storage or switching to fuel oil. Gazprom’s mantra that it, really is, a reliable supplier sounds hollow. But so does Ukraine’s claim to be the innocent victim of neo-imperialist policies.

Third, the stakes for both Ukraine and Russia are a lot higher. In 2006, Ukraine’s economy grew by more than 7 per cent despite higher gas prices, as exports of steel and chemicals boomed. At the end of 2008, Ukraine’s economy was in meltdown, with industrial production down 30 per cent year on year in November. The Ukrainian currency has plummeted 40 per cent against the dollar since September. So paying for imports – including energy – would be a lot harder even if gas prices stayed the same. The IMF, which has pledged $16 billion to shore up the Ukrainian economy, will demand that the government phase out energy subsidies to keep the budget deficit under control. That means that more of any gas price increase will have to be passed on to households. With inflation already running at 20 per cent and presidential elections coming up next year, Ukraine simply cannot afford a rise to $450 per 1,000 cubic metres, as requested by Gazprom after the negotiations broke down.

Russia is also in a very different position. Its external surplus and reserves are dwindling. Gazprom, like most Russian companies, is seriously short of cash. Ukraine buys more than 40 billion cubic metres of gas from Russia a year, which makes it one of Gazprom’s bigger customers. So the price of these sales does matter for Russia. However, the costs of a sustained interruption of gas flows would be immeasurably higher. Not only because Gazprom could face an avalanche of law suits from European companies if supply contracts were breached, but also because Gazprom could lose its standing in its biggest and most lucrative market. That is already happening.

The final, and perhaps most important, difference between the 2006 and today is that Europe is more likely to draw the right conclusions. After the 2006 cut-off, the Europeans panicked – and then the EU proceeded to lecture Russia on how to run its energy sector and export business while individual EU countries rushed to sign long-term bilateral agreements with Gazprom to secure their own supplies. This did not work. Today, the Europeans will (hopefully) focus on what they can do together to increase their energy security: build a functioning internal gas market, invest more in gas storage and focus on alternative sources of gas, for example from the Caspian via Nabucco and in the form of LNG from Northern Africa and the Middle East. They also need to reinforce their efforts to achieve their 20 per cent energy savings target and explore alternative sources of power, namely renewables and nuclear. If the gas standoff reminds the Europeans of the importance of such measures, Russia and Ukraine will have done the EU a favour.